My guest blog for Shelter on the problems caused by the high value of land and why lower cost land is only part of the solution
The latest ONS’ National Balance Sheet shows that land was worth £5.0 trillion at the end of 2016, nearly five times the amount it was twenty years ago. Back in 1996 it accounted for one-third of the UK economy’s net worth and now accounts for over half. The substantial rise in the value of land explains a lot about the housing crisis – and what’s needed to fix it.

Source: ONS National Balance Sheet
Households own the majority of the value of land (77%) and most of that is the land beneath our homes. There’s no simple dataset for the value of the land beneath our homes, and so ONS calculate it using a residual approach. That approach starts with the average house price and then takes away the cost of building the dwelling while accounting for any depreciation. The remaining amount is the value of land.
The value of land doesn’t just reflect its area or its physical attributes, but also the economic value arising from its location. For example, everyone knows a flat near a train station and in the catchment area of a good school will be worth far more than an identical flat without those locational advantages. After twenty years of house price rises, most homes now cost much more than their rebuild cost: it is not the bricks and mortar but the location value of the land that has increased.

Source: ONS National Balance Sheet
The rise in the location value of land creates a challenge in building new homes that are affordable for everyone that needs them. This is because the value of land due to its location is not usually the same as the cost of development land. The value of land includes not only the cost of development, but also housebuilder profits, contributions to affordable housing, local amenities & facilities, transport improvements, etc. These all compete for a share in the location value of the land which will be released by the development of new homes for sale.
The price of new homes for sale (and hence the location value of land) is determined by a multitude of factors, most are local, some are national, and a couple are even global. Housebuilders may be able to affect some of these, e.g. by paying for transport improvements, but most are beyond their control.
This means that just reducing the cost of development land will not necessarily lead to lower priced new homes, as the location value of the land remains the same. If the location value of the land is not captured by landowners in the cost of the development land, then it will be captured at some other stage of the process. This can be seen in the recent financial accounts of listed housebuilders. Tight control on development land costs mean the location value of land has been increasingly captured in housebuilder profits.
And if that locational land value is not captured by developers either, but was passed on to the buyers of the new homes in the form of lower sales prices, those homeowners would be able to capture it by selling on the homes at the full market price.
Building more affordable homes is an essential part of the solution to the housing crisis. However, the high location value of land means that homes built for sale in the market are unlikely to be affordable for everyone that needs them, particularly in the highest demand markets. Unfortunately, reducing the cost of development land won’t be sufficient on its own, as the remaining location value of the land will be captured by others, most likely the developer. Instead we need to ensure that when building new homes, a fairer share of the location value of land is captured for the benefit of local communities, both new and existing – for example in the form of permanently affordable homes, such as social rent.
Only then will we have sufficient numbers of new homes built at a price that is affordable for everyone that needs them.

Source: Persimmon Accounts & Presentations